Trading on prediction markets is surging during election seasons, prompting some states to seek bans on these platforms, which they liken to unlicensed casinos. The escalating activity has election administrators worried about how high-stakes odds could unpredictably affect American democracy.
Concerns primarily center on the fear that financial incentives tied to election outcomes could further erode public confidence in elections and democracy. "This is a troubling trend that election administrators across the nation must deal with," said Jared DeMarinis, administrator for the Maryland State Board of Elections.
Platforms like Polymarket and Kalshi allow users to buy and sell contracts based on the predicted outcomes of events, including mayoral, gubernatorial, and U.S. Senate races. The volume of trading has escalated significantly this year, drawing attention from officials grappling with misinformation and conspiracy theories.
Kalshi and Polymarket officials argue that their platforms do not constitute gambling and do not pose a threat to elections or democracy. They draw parallels to stock market trading, where investors anticipate how election results might impact their investments. Joshua Mitts, a professor at Columbia Law School specializing in corporate and securities law, noted that the stock market itself is influenced by election outcomes.
These prediction market operators state they have insider trading protections, mandated by federal law, to prevent individuals like candidates and campaign staff from trading on their own races. Kalshi, for example, reported suspending and fining a North Carolina congressional candidate for trading on her own race. The platform also asserts that its markets closely correlate with actual outcomes, and that any attempts to manipulate odds are countered by traders seeking to profit from accurate predictions.
Despite these assurances, prediction markets have faced criticism. In one instance, a candidate heavily favored on these markets lost a primary for Wisconsin governor, mirroring inaccuracies in polling for that race. In another case during Los Angeles's mayoral primary, online commentators accused election officials of manipulating results after market odds favored a specific Republican candidate's advancement to a runoff.
Legal battles are underway in various states over whether prediction markets can be regulated or banned under existing gambling laws. Many states also have statutes prohibiting betting on elections, enacted to ensure voters choose candidates based on merit rather than financial stakes. With court decisions unlikely before the upcoming elections, trading volumes on platforms like Kalshi and Polymarket are expected to reach unprecedented levels across nearly every state.
Election officials are considering how to educate the public about the distinction between prediction market odds, polls, and vote counts. Some are also exploring policy measures to safeguard election integrity. Jim Allen, elections director in Delaware County, Pennsylvania, proposed adding prediction market trading to the mandatory oath for election workers. DeMarinis plans to advocate for a similar statewide requirement in Maryland.
Concerns also exist about how prediction markets might be manipulated to benefit candidates. Wealthy individuals could potentially inflate odds for their preferred candidates, aiming to sway public opinion. Analysts suggest that voters seeing unfavorable odds for a candidate might be discouraged from voting. Candidates could leverage favorable odds, similar to poll results, for fundraising or endorsement purposes.
"And all of a sudden, they’re the front-runner, for no reason other than an outside actor places a large bet on them," said Ben Schiffrin, director of securities policy for Better Markets.
Eric Talley, a law professor at Columbia University, referenced research by behavioral economist Colin Camerer, which demonstrated how a single large bet on a horse race could influence others to bet on the same horse, temporarily skewing odds. Talley sees this as a potential parallel to the current situation with prediction markets.
Prediction market operators maintain that such manipulation is short-lived in highly liquid markets, as financially motivated traders correct inaccurate pricing. "If you’re going to try to manipulate the pricing in a highly liquid market with strong traders, it’s not going to work. The pricing will snap back, and you’ll simply lose money," stated Kalshi general counsel Rick Heaslip.
However, legal experts like Mitts suggest that candidates in smaller, local elections might encourage supporters to bet on them in prediction markets, potentially motivating those individuals to vote. While such a tactic might be more feasible in elections decided by a narrow margin, its effectiveness would depend on the financial incentive. "You can understand why states would say from the election integrity standpoint, ‘We don’t want this sort of contract to trade at all,’” Mitts commented.